Your Cash Needs a Job Too
Not all your money should be in the stock market. Your emergency fund, short-term savings (next 1-5 years), and cash reserves for upcoming expenses need somewhere safe that still earns interest. HYSAs, bonds, and CDs all fit this role — but they work differently.
High-Yield Savings Accounts (HYSAs)
Current rates: 4.0-5.0% APY at online banks (Marcus, Ally, Wealthfront, Sofi). Liquidity: Full. Withdraw anytime with no penalty. Transfer to checking in 1-2 business days (same-day at some banks). Risk: Zero (FDIC insured up to $250K). Minimum: Usually $0. Tax treatment: Interest taxed as ordinary income (federal + state).
HYSAs are the default choice for emergency funds and short-term cash. The rate is variable — it moves with the Fed funds rate — so today's 4.5% could be 3% in a year if rates drop. But you're never locked in, and your money is always accessible.
Certificates of Deposit (CDs)
Current rates: 4.2-5.0% APY for 6-12 month terms. Longer terms (2-5 years) often pay less due to the inverted yield curve. Liquidity: Low. Your money is locked for the term (3 months to 5 years). Early withdrawal penalty: typically 3-6 months of interest. Risk: Zero (FDIC insured). Minimum: $500-$1,000 at most banks. Tax treatment: Interest taxed as ordinary income.
CDs make sense when you want to lock in a rate (if you believe rates will drop) and you don't need the money during the term. A CD ladder — buying CDs with staggered maturity dates (3-month, 6-month, 9-month, 12-month) — gives you regular access while locking in current rates.
Treasury Bonds/Bills
Current rates: 4.0-4.5% for short-term T-bills (4-week to 1-year). Liquidity: Moderate. You can sell before maturity on the secondary market, but the price may be slightly above or below what you paid. T-bills held to maturity return full face value. Risk: Zero (backed by the US government). Minimum: $100 on TreasuryDirect.gov. Tax treatment: Interest is exempt from state and local tax — only federal tax applies.
The state tax exemption is the key advantage. If you live in a state with 5%+ income tax (California, New York, New Jersey), Treasuries pay an effective 0.2-0.5% more than HYSAs and CDs after state taxes. On $50,000: that's $100-$250/year extra. The $100 Network includes calculators that compare after-tax returns across cash vehicles based on your specific state.
I-Bonds (Inflation-Protected)
Current rate: 3.1-5.0% (composite rate changes every 6 months based on inflation). Liquidity: Low. Must hold 1 year minimum. 3-month interest penalty if redeemed before 5 years. Risk: Zero. Maximum: $10,000/year per person ($15K with tax refund option). Tax treatment: Federal tax only, deferred until redemption.
I-Bonds are ideal for protecting purchasing power against inflation. The rate adjusts with CPI, so if inflation spikes, your return increases. Best used for money you won't need for 1-5 years.
Which to Choose?
Emergency fund: HYSA. Full stop. Liquidity is non-negotiable for emergencies.
Cash you won't need for 6-12 months: CD or T-bill — whichever pays more after taxes in your state.
Cash you won't need for 1-5 years: I-Bond (up to $10K/year) for inflation protection plus HYSA or CDs for the rest.
Large cash holdings ($50K+) in high-tax states: Treasury bills for state tax savings.
The Bottom Line
All four options pay 4-5% with zero risk. The differences are liquidity (HYSA wins), rate lock (CDs win), and tax treatment (Treasuries win in high-tax states). Use HYSAs for emergency and operating cash, CDs or T-bills for known time horizons, and I-Bonds for inflation protection. Your cash should earn 4%+ — anything less means you're leaving money on the table.